5 Stocks Sell-Side Analysts Believe Will Turn Around
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Even with the market as a whole doing well over the last year, a number of stocks have seen significant declines in their stock prices. While this is at least in part due to poor company performance, it’s also possible for the markets to get carried away. While there are a number of ways to measure value (or potential value), one technique is to look at the forward price-to-earnings multiple to see how the current valuation compares to expected earnings per share for the next year.
Investors can then perform further research on any interesting names and decide whether or not it is worth the risk to trust the sell-side over the market.
Using data from Fidelity, here are five stocks which are down at least 25% in the last year and which are valued at less than 10 times forward earnings estimates.
The top two
The first troubled company on our list is Barrick Gold (NYSE: ABX). Barrick has fallen nearly 60% in the last year, as gold prices have declined substantially of late. In the first quarter of 2013, earnings fell 19% versus a year earlier -- and gold is down further since that time. It’s always risky to be long gold in any form, but Wall Street analysts are optimistic that Barrick will do all right in 2014 leading to a quite cheap forward P/E. The stock also pays a 4.7% dividend yield at current prices, though continued trouble for the company would likely lead to the dividend being cut.
Teck Resources (NYSE: TCK) also meets our criteria, with the stock sliding 30% over the last year and with the $12 billion market cap industrial metals company trading at 9 times forward earnings estimates. Teck focuses on copper, metallurgical coal, and zinc; with demand for these resources being highly dependent on macro conditions, the stock’s beta is 2.5. It’s another stock which -- at least going by recent dividend payments -- is a high yielder, at 4.1%. In addition, its net income actually increased last quarter compared to the first quarter of 2012, even though revenue was down.
Best of the rest
A roughly 50% decline over the last year has brought Apollo Group's (NASDAQ: APOL) earnings multiples much lower, including a forward P/E of 9. The for-profit education company is clearly in decline, with revenue falling 13% in its most recent quarter compared to the same period in the previous fiscal year and net income down nearly 80%, and many market players remain short the stock. As such, Apollo seems like quite a risk to us.
We track quarterly 13F filings from hundreds of hedge funds and other notable investors as part of our work developing investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year) and can see from our database that billionaire Glenn Dubin’s Highbridge Capital Management bought 1.4 million shares during Q1; see Dubin's stock picks.
Oil and gas exploration and production company Halcon Resources (NASDAQ: RAM) focuses on onshore U.S. shale plays such as North Dakota’s Bakken. It is down over 40% in the last year, with many market players expecting further declines (16% of the float is held short). Profitability is very low, but revenue has recently been surging as production has increased. Consensus forecasts see EPS roughly doubling from $0.31 this year to $0.64 in 2014. If Halcon hits that target, then the current market capitalization of just over $2 billion would represent a forward earnings multiple of 9.
Rounding out our list is Cliffs Natural Resources (NYSE: CLF), which has plunged over 60% since the end of June 2012. It’s also a quite popular short target, with the most recent data showing that short sellers are responsible for 32% of the float. Cliffs produces iron ore and metallurgical coal -- each an input in steel production, and therefore dependent on the overall economy. At its current market cap, it is valued at 9 times expected earnings for 2014. SAC Capital Advisors, managed by billionaire Steven Cohen, owned 3.5 million shares of Cliffs as of the end of March; find Cohen’s favorite stocks.
There are many ways to analyze Mr. Market and its hundreds of publicly traded companies, but one way to find deep value plays is by looking at stocks that are down significantly and cheap. Obviously, the aforementioned companies -- Cliffs Natural Resources, Halcon Resources, Apollo Group, Teck Resources, and Barrick Gold -- can be considered value traps, but there’s an equal chance that they could turn it around. We’ll be watching closely for the rest of 2013.
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!